Haynes International, Inc. (HAYN) on Q1 2021 Results - Earnings Call Transcript
Operator: Good morning ladies and gentlemen. And welcome to Haynes International Inc First Quarter Fiscal 2021 Financial Results Conference Call. At this time, all participants have been placed on a listen-only mode and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor to your host David Van Bibber. Sir, the floor is yours.
David Van Bibber: Thank you very much for joining us today. With me today are Mike Shor, President and CEO of Haynes International; and Dan Maudlin, Vice President and Chief Financial Officer. Before we get started, I would like to read the brief cautionary note regarding forward-looking statements. This conference call contains statements that are forward looking within the meaning of the Private Securities Litigation and Reform Act of 1995 and Section 21E of the Securities and Exchange Act of 1934. The words believe, anticipate, plan and similar expressions are intended to identify forward-looking statements.
Mike Shor : Thanks, Dave. Good morning, everyone. It's interesting for me to take a step back and look at where we've been since the pandemic began. And where I believe we were headed. Six months ago, during the Q3 earnings call, we discussed the significant impact of the pandemic driven volume reduction was having on our business. At that point, we were still in the discovery phase of understanding how far line would drop. Three months ago during the Q4 earnings call, we highlighted the actions that we were taking to stabilize our business during these very difficult times. Our visibility is still unclear, our recent conversations with customers, as well as our recent order entry trends leads us to believe that Q1 is at or near the bottom of this unprecedented downturn. This quarter as compared to last year's Q1 as volume down 34% and revenue down 33.4%; gross margin percent this quarter was volume impacted 1.4% versus 17.3% last year. Net loss this quarter was $8 million, compared to net income of $3.3 million last year. These are difficult numbers for us to see, they reflect the full weight of the pandemic. As a team, we are focusing our attention on properly positioning our company for the future. We believe that this would begin the process of emergency downturn; we do so with strong business fundamentals. I'm proud of our entire team for accomplishing what we committed to both before and during the pandemic specifically related to gross margin, significant lowering our breakeven volume and cash generation. I'll now provide a few comments on each of these areas. Our previous work on improving gross margins was critical to our long-term success. We achieved 18% gross margin prior to the start of the pandemic, expanding our quarter on quarter gross margin percent by 670 basis points in Q1 of fiscal '20. And by 580 basis points in Q2 of fiscal '20. This was accomplished by our teams focused on pricing for value and relentless cost reductions. And important point achieving 18% was not an endpoint for gross margin percent progress, but it was a great step in the right direction.
Dan Maudlin: Thank you, Mike. Volumes shipped in the first quarter of fiscal '21 was 2.8 million pounds, a reduction of 1.4 million pounds or 33.9% from the same period last year and a 5.2% reduction sequentially from the fourth quarter of fiscal '20. This significantly lower produced and shipped to volume continues to be the primary issue impacting our financial results. Many of our customers are in a cash preservation mode, which resulted in conservative quarter entry trends. Combine that with elevated inventory throughout the supply chain, particularly in aerospace, also contributed to lower volumes. Sales to the aerospace market accounted for 34% of our revenue at $24.6 million. This is a decrease of roughly 27% sequentially from Q4 and a decrease of 58% from the same period last year. The aerospace market has been the most impacted by the pandemic, with reductions in commercial aerospace build schedules and reductions in repair and maintenance and overall activity. Complicating the demand situation continues to be elevated amount of inventory throughout the aerospace supply chain. Destocking is expected to continue during fiscal '21. Notable milestones in the aerospace industry include: the start of the vaccine rollout and its impact on people's confidence to fly again combined with the recertification of the Boeing 737 MAX to fly. As Mike mentioned, it's expected to still take time to get back to pre-pandemic aerospace levels. Backlog dollars in aerospace decreased sequentially from Q4 to Q1 by 11% and down 51% year-over-year. First quarter sales to the chemical processing market accounted for 21% of our revenue at $15.3 million. This is a decrease of 18% sequentially from Q4 and a decrease of 9% from the same period last year. Demand in this market continues to be impacted by COVID-19 and generally lower oil prices causing chemical companies to delay their CapEx spending. The commodity side of this market is highly competitive, with many producers seeking volume.
Mike Shor: Thank you, Dan. I want to thank all of you for your continued interest in Haynes and your patience as we weather these unprecedented times. I, again, also want to thank our employees. Together, we continue to work on protecting the health of our workforce on enhancing what differentiates Haynes to competition and on implementing the actions required related to our key metrics for success. With that, Matthew, let's open the call up for some questions.
Operator: Your first question is coming from Stephen O'Hara. Your line is live.
Q - Stephen O: I mean, I know this is a challenging period for you guys, and it seems like you guys have done a really great job kind of maintaining the balance sheet, generating cash. And you talked about kind of the previous gross margin work that you've done. Can you talk about maybe -- is there a way to frame kind of without that work done in the past and where we'd be today? I mean, it would seem like that work would be a lot more difficult, maybe a lot more painful in the face of a downturn, obviously necessary. But I mean, is there a way to kind of think about that where we'd be today?
Hara: I mean, I know this is a challenging period for you guys, and it seems like you guys have done a really great job kind of maintaining the balance sheet, generating cash. And you talked about kind of the previous gross margin work that you've done. Can you talk about maybe -- is there a way to frame kind of without that work done in the past and where we'd be today? I mean, it would seem like that work would be a lot more difficult, maybe a lot more painful in the face of a downturn, obviously necessary. But I mean, is there a way to kind of think about that where we'd be today?
Dan Maudlin: Well, let me just put it in perspective for you. We were -- again, we could -- all through '17 and through '18, we couldn't make money unless we hit 5 million pounds shipped a quarter. And when you look at our history, 5 million pounds is not that common, which is why we're losing money through '17 and '18. We obviously focused on price, and we focused on our relentless cost reduction. And I think the most telling signal for us is once the 737 issue hit before the pandemic hit, our volume dropped from 5 million pounds to about 4.2 million pounds a quarter. And even with that, we were wrapping up pre-pandemic times at about 18% gross margin. So a significant difference from where we were when we started this thing and obviously, when we look back at where we could be if we had not made those improvements there be a concern.
Q - Stephen O: Okay. No, that's helpful. And then just -- I don't think this is the case. But I mean, you guys haven't received -- I mean, again, I think the cash flow is pretty significant. And obviously, I think that you guys have done a great job there. I mean, there's no -- I mean, there's no government stimulus in there anything like that or CARES Act benefits or anything? Is that kind of -- is that the fact?
Hara: Okay. No, that's helpful. And then just -- I don't think this is the case. But I mean, you guys haven't received -- I mean, again, I think the cash flow is pretty significant. And obviously, I think that you guys have done a great job there. I mean, there's no -- I mean, there's no government stimulus in there anything like that or CARES Act benefits or anything? Is that kind of -- is that the fact?
Dan Maudlin: That's correct.
Mike Shor: That's correct. We did not take any kind of PPP loan or anything like that. I mean, there is a little bit of deferral of payroll taxes, paying those, but that's not significant.
Dan Maudlin: The team's done, Steve, I think a real good job of not only reducing inventory, but very closely monitoring our payables and receivables. And obviously, that's led to real nice cash generation since this thing began.
Mike Shor: We literally look at cash flow every day.
Q - Stephen O: Okay. No, that's helpful. And then maybe last one, and I'll jump back in queue. But just -- I mean, if you listen to the airlines, it sounds like they expect capacity to be kind of well above where demand is, their liquidity is -- I think United was about 3 times what it was in March as of 4Q. And I'm just kind of curious, I mean, does that help it? I mean, are you starting to see maybe some more positivity there just based on the capacity coming back? And then maybe that's kind of the precursor to getting some of these MAXs back in fleets and getting that production started again? Or is that kind of just maybe wishful thinking at this point based on what you're hearing from customers?
Hara: Okay. No, that's helpful. And then maybe last one, and I'll jump back in queue. But just -- I mean, if you listen to the airlines, it sounds like they expect capacity to be kind of well above where demand is, their liquidity is -- I think United was about 3 times what it was in March as of 4Q. And I'm just kind of curious, I mean, does that help it? I mean, are you starting to see maybe some more positivity there just based on the capacity coming back? And then maybe that's kind of the precursor to getting some of these MAXs back in fleets and getting that production started again? Or is that kind of just maybe wishful thinking at this point based on what you're hearing from customers?
Dan Maudlin: I think it's going to take a little while for inventory in the supply chain to come down. I mean, when you -- I love the positive comments we've all read about pent-up demand and all the rest of that. But I also check, as we all do almost every door, every day, the number of flyers going through TSA checkpoints, and that is continuing to be very low. And the facts are the airlines were a little below 50% fewer flights in '20 versus '19. Passenger traffic is down 67% in 2020. The number of flights operated in 2020 was the lowest level since 1999. So you put those things into account and then you look at what was supposed to happen with the LEAP engine for the A320 and the MAX and the amount of material in the supply chain. Bottom line is people need to start flying again. And my view is we're certainly in the early stages of the vaccine. But as the vaccine comes and as people start flying again, then obviously, there's going to be great interest in starting to build aircraft. And the only advantage of having -- being on this end of the supply chain, one of the advantages is when they believe the demand will come, we'll feel it very quickly because of lead time. So it's going to take some time. We're expecting probably plus or minus 6 months to start seeing aerospace orders come in based on what we see in the inventory supply chain, but it is going to take some time to get there.
Mike Shor: And one thing I might add to that is we talk about how we're positioning ourselves for the upturn. And just our basic business model, as Mike mentioned in his prepared remarks, being a mill and a service center, having inventory on the ground in a service center will allow customers to order smaller lots if they want to start slow in this demand recovery, but that will help us immediately through the service centers. So we're prepared for the upturn and can't wait for it to be here. Obviously, the vaccine and MAX flying again, I think, are very positive things. But it'll take some time.
Operator: Your next question is coming from Michael Leshock. Your line is live.
Michael Leshock: So you said you're at or near the bottom, you think. That said, I just wanted to get your take on how you're thinking about potentially bringing back some of the headcount in terms of your hiring cadence over the next several quarters if we get a recovery here? And if you could provide any color as well on the cost cuts you've taken during the pandemic in terms of how much will be coming back versus being structural? That would be helpful.
Mike Shor: Sure. First, I got to look at where we are capacity-wise or volume-wise. We're down in our wire facility, 1/3 were down in Kokomo. Our produced pounds are down about 50%. And in our tube facility, they're down either more. So when you look at that in the January to November time period, we took out 211 people, which is 17% of our overall workforce. So two points on that. Number one, we will be slow to bring people back because we want to make sure what we begin to see is real. So we are going to make sure, both on the production side and on the salary side, that we take full advantage of the employees we have and be very careful when we bring people back. Again, the key here for me, especially in aerospace, is the slope. We're not sure how fast this will happen. We read everything that everyone else reads, so we're going to take this a little bit time. On the salary side, we'll certainly continue to bring people in that are going to help us on continuing to promote our high-value differentiated products, but it will be slow to bring many salaried people back.
Michael Leshock: I wanted to get your take on the recent pushouts by Boeing and Airbus, specifically on the slower-than-expected ramps on the MAX and A320 and you talked about the LEAP engine. But also on the 777X, I know you have proprietary alloys there on the GE9X. So how -- to what extent did you anticipate some sort of slowing here based on what you've heard from the supply chain? And are you seeing any hesitancy within customers from -- because of these announcements?
Mike Shor: We've done -- as we've talked about before, the LEAP engine for single-aisle is really the key metric for us. And watching the LEAP, and what happens with the LEAP, and what happens with the build there is significant. And I think many in the industry are seeing somewhere in the range of about 850 LEAP engines being built in the year we're in now. And it's interesting when we've done the math multiple times, if you assume that there is no change whatsoever in current build there is no change whatsoever in is no change whatsoever in schedule, said another way, 40 Airbus, 40 A320s and 10 Boeing planes, that 797 plains plus spares. If you think -- if you go with the -- what I now would say is an aggressive look, which is Airbus getting to 47 within 6 months, which none of us think is going to happen. And Boeing getting to 17 within 6 months, which anyone could take a bet on that, that's 929, so plus spare. So the 850 is a most likely level for us, and that's what we're planning on. And that's why we think there's still 6 to 9 months in the supply chain. As far as 777 and the GE9X, it's disappointing. We -- our whole fundamental business model is all about proprietary alloys. And as we've talked about, and I'm sure everyone is tired of hearing, we have two proprietary alloys in the GEnx GE9X engine. And that's significant for us. And that being pushed out to 2023 is a concern, but we continue to go after the other business and continue to look for ways to develop new alloys for next-generation engines elsewhere.
Michael Leshock: Got it. That's really helpful. Then just lastly for me, on CapEx, it was pretty low in the quarter. I think of your base maintenance is around $8 million to $10 million annually. Is that a fair range? And how do you see that trending?
Mike Shor: Yes. Well, as far as long-term trends, we've spent the money we need to spend, in particular in the aerospace business with our $120 million we invested between 2012 and 2018, plus or minus. So we believe and we've said next 3 to 5 years in that range, we'll be well below depreciation in that $10 million plus or minus range. And what we said publicly is about $10 million this year. So we're going to stick to that for now. Got off to a slow start, but there's plenty of people banging on my door and Dan's door as far as money that they need to spend. So I think 10 is a good maintenance number for us. I think below that is a concern, but I don't think we'll get above that. get above that.
Operator: Your next question is coming from Chris Olin. Your line is live.
Chris Olin: So Dan, I was wondering if you, maybe I missed it, provided any information regarding special projects where we're at outlook? I guess, just to tie on to that, should we assume that those numbers are going to stay low for a couple of quarters until CapEx budget come back up start?
Dan Maudlin: Yes. I mentioned special projects. This; quarter we're about $4.4 million, a little down from Q4 by about $1.5 million. And if you look at last year, we had a really good quarter last year in Q1, had about $8.5 million last year. So the delta, Q1 to Q1, is a little over $4 million in special projects.
Mike Shor: Chris, let me add some additional color to that. In these times, we're all looking for some positives. And when we built in the special projects, the numbers that Dan is talking about, what we really found is that there's really two components in there. There is the lower end, more commoditized alloys that are in there, that we are helping our customers get into applications and are upgrades for them, but they're relatively high volume and to be honest they're relatively low margin. So we decided between Dan and Venkat Ihswar and myself that we would take a second slice of special projects. So by the way, just to back up, special projects for us as we talk about our non-aerospace typically there, CPI and other. So what we did, and this is a different slice for you, is we looked at just the proprietary and specialty alloys, not the commodities that were in there that we did drive in applications. And what's interesting in fiscal '20 versus '19, they were up 24%. And in fiscal '21 versus '20, they're about flat. So what is not in there, there's a lot of the more the products that we drove in applications but the more commoditized products. So I feel good about our team continuing to drive the high-value differentiated products even in these tough times. Sorry for the long answer, but it's a different way to look at it.
Dan Maudlin: And when we look at special projects without some of those commoditized alloys, the margin that we track on it definitely goes up. So what we're looking at here are the higher profitable special project.
Chris Olin: Interesting. Okay. Mike, you're talking about market share wins on the IGT side and kind of your success there. We've seen some movement within your competitive space in terms of people targeting different products, different mixes. I'm just wondering how you feel about protecting that market share going forward?
Mike Shor: Really good about it, Chris. And you really have to take it by a market. Okay? We've talked about power generation. Okay? And we have -- we obviously cannot name our customer, but we've gained, for us, significant share in that market. And I love it because Dan and I talked about it when it actually happened. So that was a real good thing. Also, we've got an alloy called 282, one of our proprietary alloys within IGT, which is being spec-ed in to make engines more efficient, both the new engines in certain categories and will be eventually with some spare parts. So feel really good about our share growing in IGT. In aerospace, we follow it every customer, every contract we have. And obviously, on the transactional side, there's going to be pluses and minus. There always is every day. But contract side, we renegotiated, in January, 10% to 15% of our contracts, which is all the high-value differentiated product. We did not lose anything there. So feel really good about where we are in aerospace. Chemical processing, it's really the world of 2 different groups of products there. On the special project side, again, in this market to grow from '20 to '21 and stay stable '21 versus '20, so far we '21 and stay stable feel great about that. On the commodity side, the C alloy side of this for us in CPI, we see people going after some larger or some intermediate-sized projects they hadn't gone over before. So I wouldn't be surprised on the CPI side, if temporarily, we've lost a few orders, but that is not unusual as companies get aggressive. And I can tell you, based on history, they will be back to us.
Chris Olin: Last question, just kind of tying into the inventory comments you made regarding aerospace. I was just wondering if you could separate it between the tubing -- the titanium tubing business and nickel alloys. Is there a difference between how you see the inventory playing out or that you're seeing?
Mike Shor: Yes. Good question. We've seen as far as cancellations -- and I'll use that as an example. These cancellations typically go with what's going on with inventory and the backlog. We've seen that most nickel and cobalt cancellations are behind us, but we're still seeing on the airframe side, cancellations, which we expect to go on for probably another 6 months, plus or minus. So my -- I also believe there was a real demand crunch pre-pandemic on titanium tubing. So I think there was -- on the airframe side, there was a lot of inventory built beyond even everywhere else. So I see titanium tubing taking longer to come back than I see engine business coming back.
Operator: Your next question is coming from Stephen O'Hara. Your line is live.
Stephen O’Hara: Just on the -- moving back to kind of trends in aerospace and things like that. I mean, if we think about the trend towards ESG and green technology, things like that, I mean, it seems like most industries, including airlines have made some pretty, you might say, grandiose projections about how little carbon limit within certain periods of time. Does that trend -- I mean, the trend, obviously, I think is real, but I mean, does that trend benefit Haynes? As the technology needed to make engines more efficient, whether it's either to save money or to cut emissions, I mean, does that benefit you guys long term? Is that a long-term secular trend that benefits you guys?
Mike Shor: The answer is yes. And it's not only aerospace but it's power generation. The use of our 282 alloy, being spec-ed into a fair amount of power generation engines, is allowing for more efficiency. So when we talk about ESG and the environmental side of ESG, we're not only talking about what we're trying to do within our company, but we're talking about the impact it has in aerospace engines being more fuel efficient, being able to burn hotter because of being able to use some of these unique alloys. So It definitely helps. And it's also no different than what we've got going into the GE9X engine and what's happening there. So yes, I think it helps. And then when you take a longer-term view of this thing and look at, "Okay, what's going to happen in 10 years? Is hydrogen going to play a bigger role in this?" We've got our technical people all over trying to understand the role of hydrogen in power generation technology and engine technology going forward and how we feel the need there. So yes, we feel really good about that.
Dan Maudlin: Then if you think about the hydrocarbon industry now, oil and gas, we have some slight exposure to that, but not a huge exposure for us. Oil and gas is not one of our major markets. So kind of to shift away from that is not going to be that big of a takeaway for us, but certainly see some gains on the other side.
Operator: Thank you. There are no further questions in the queue at this time.
Mike Shor: Okay. I don't see any questions in the queue. So with that, first of all, Matthew, thank you, and thank you all for your time today, and thank you for your interest and support of Haynes. Please be safe, and we look forward to talking to you again next quarter. Thanks, everybody.
Operator: Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.
